BT lifted profits 17 per cent between April to June as its cost-cutting plan continued to pay off, in what the group's chief executive called an "acceptable" start to its financial year.

BT faced down potential strike action earlier this month and also announced it was to start offering customers Sky Sports content. There was more good news in its first-quarter numbers yesterday as pre-tax profits hit £446m, up from £382m in the corresponding period a year earlier.

Ian Livingston, BT's chief executive, said: "We have made an acceptable start to the year, delivering improved financial results while investing in the future of the business."

Revenues declined 4 per cent from £5.2bn in the first quarter of 2009 to £5bn this year. Yet, the group's operating costs fell 6 per cent to £4.4bn, principally due to reductions in labour costs. Robert Grindle, an analyst at Deutsche Bank, said the results were "solid".

While the City raised fears over how the Government's cuts could affect the group, BT reiterated its outlook for the full year "despite the challenging environment", Mr Livingston said. Government contracts make up 10 per cent of group revenues, and BT said the cuts posed an "opportunity and a challenge". Mr Grindle added: "The challenges of government contracts are real."

The company added 96,000 new customers to its broadband service during the quarter, which has increased since the launch of its fibre-based broadband product "Infinity" in January.

Mr Livingston backed a solid performance at BT's Global Services division, which had dragged the group to a full-year loss in 2008. While revenues at the division declined 3 per cent, the group's head said: "In BT Global Services we continue to win significant contracts due to our ability to deliver a world-class service to our customers."

The group surprised analysts over its free cash flow. While the research houses had predicted £100m of outflows, it actually recorded an inflow of £415m because of "the improved profitability and lower capital expenditure".

The issue of the pension still looms over BT. The group proposed a plan in February to plug the deficit, which was then valued at £9bn. The Pension Regulator rejected the plan and it remains under review. Yet BT revealed that the deficit now stands at £6.6bn following a recovery in the equity market.

BT is also awaiting the result of a case in the High Court, over the Crown guarantee. The case revolves around whether the Government would cover BT's pensions if the company were to go bust.